Governor administration has cleared a proposal to treat J&K Bank as PSU. How that happened, what it means:

What has changed at J&K Bank?

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On November 22, a day after Governor Satya Pal Malik dissolved the Assembly, the State Administrative Council under his chairmanship approved a proposal for treating Jammu and Kashmir Bank (J&K Bank) Ltd as a public-sector undertaking. It will hence be accountable to the state legislature, and the Finance Department will be required to place the bank’s annual report before the Assembly. The SAC approved a proposal that provisions of the J&K Right to Information Act, 2009, shall be applicable to the bank just like other state-owned undertakings. It will have to follow guidelines of the Central Vigilance Commission. The department has been asked to issue directions to the bank to follow the decisions of the SAC. The bank is yet to receive these directions.

What is the reason for the move?

The state government holds a majority stake of 59.3% in J&K Bank. A need was felt that it should have the character of a PSU, which is subject to general supervision and access for enhanced transparency in transaction of business to promote public trust. “Extension of the RTI Act and CVC guidelines is only aimed at promoting good governance and transparency in the functioning of the bank. The purpose of the SAC decision is not to question the day-to-day activities of the bank management but a step towards strengthening better corporate governance,” the government said in a press statement.

What does the Reserve Bank of India consider J&K Bank to be?

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It was incorporated on October 1, 1938 as a limited liability company to offer banking facilities in the state. The bank is licensed as an “old private-sector bank” under Section 22 of the Banking Regulation Act, 1949. Classified as a state government company, it is registered with Registrar of Companies, Jammu. It launched a public issue in 1998 and is listed on both the Bombay and National stock exchanges. While RBI as the regulator supervises J&K Bank, the Comptroller and Auditor General (CAG) audits the books of banks. RBI has been in communication with CAG stating that as the banking regulator, it is RBI’s prerogative to audit the bank, not CAG’s. CAG may stop auditing J&K Bank, it has argued.

What is unique about J&K Bank?

It is the only bank in India in which a state government holds a majority stake. In all public-sector banks, the majority stake is held by the Centre. As per the Banking Companies (Acquisition & Transfer of Undertakings) Act, the central government holding in public-sector banks cannot drop below 51%. Thought the state government holds 59.3% in J&K Bank, it is not considered a public-sector bank. This unique status needs to be seen in the context of Article 370 of the Constitution, which gives special autonomous status to the state of Jammu & Kashmir. J&K Bank is the largest employer among all state-promoted entities with a workforce of 9,190 in 2015-16. Among the 10 PSUs out of 30 that earned profit, J&K Bank accounted for Rs 416 crore (50% of the total profits of all PSUs), according to the CAG report of 2016-17. It has a record for posting uninterrupted profits. Till 2011, J&K Bank was the sole banker to the state government. In fact, akin to RBI for all other states and the Centre, J&K Bank was the lender of last resort in the state. It provided overdraft facility to the state when required. A former chairman of J&K Bank had once said that the bank performed the role of a commercial bank, a developmental financial institution, financial services provider, as well as a central bank. It lost some of this status in April 2011, when Omar Abdullah was Chief Minister; the state government gave RBI the mandate to carry out general banking business of the state and be the sole agent for investment of state funds. However, it is still the only private-sector bank designated as RBI’s agent for carrying out banking business for the state government. It is the state’s collection agent for direct taxes, utility payments, and now GST.

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Incidentally, the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) of 2002, which lets banks confiscate commercial and residential properties for recovering loans, was not applicable to J&K Bank for almost 15 years until the Supreme Court finally extended its applicability to the state in December 2016. The mortgaged property could, however, be sold only to state subjects under the Sarfaesi Act.

Is the new move legally tenable?

Prima facie, given the existing laws, treating J&K Bank as a PSU faces a couple of obstacles. According to Article 246 of the Seventh Schedule, banking as a subject comes under the Union list. The Centre holding majority stake in public-sector banks is fine; J&K Bank being classified as an old private-sector bank is fine too. But changing its character to that of a J&K PSU will be akin to empowering the state to have powers over banking. According to provisions of the Banking Regulations Act, applicable to Jammu & Kashmir since 1956, J&K Bank is licensed as an old private-sector bank and comes under the regulatory purview and supervision of RBI. Making it a PSU and bringing it under state legislature could be seen as being in contravention to these provisions.

J&K Bank has a professional board, including five independent directors, a state government nominee and an RBI nominee. Its chairman and CEO is Parvez Ahmed, a career banker, who joined J&K Bank as company secretary in 1998. The board was not kept in the loop before the decision was taken. A board meeting was called on November 26, three days after the Governor-chaired SAC approved the proposal. The legal concerns were raised by certain members, and the board is scheduled to meet again in the first week of December to discuss these issues. RBI has received no formal communication from the state government or the bank so far on this new move.

How is J&K Bank spread?

It has a dominant presence in the state. It accounts for 44% of the total number of branches in the state, and 43% of the total number of ATMs, according to the September 2017 State Level Bankers’ Committee Minutes. It accounts for almost 65% or Rs 29,975 crore of total credit and 63% or Rs 61,658 crore of total deposits (September 2017) in the state.

Who are the other shareholders?

As on December 31, 2017, foreign portfolio investors and foreign institutional investors held 15.98%, Indian mutual funds 4.98%, Indian residents 12.69 per cent, insurance companies 2.76%, and NRIs a little less than 1%. Past bank chiefs have said the move to treat it like a PSU could be challenged by the minority shareholders, and have cautioned that they may exit, leading to a fall in share prices.

How have political parties reacted?

All regional political parties have criticised the move as an assault on the bank’s autonomy. Mehbooba Mufti (PDP) has described it as a “disturbing step to snatch every bit of autonomy that our institutions have”. Omar Abdullah (National Conference) has called it a “disturbing development” and said the Governor, who is a “caretaker administrator did not have the people’s mandate to take such major decisions with far-reaching implications”. Sajad Lone (J&K People’s Conference) has said “the best thing the government of the day can do is to get out of the way”.

J&K Bank has an emotional connect with people in the state. In existence even before Independence, it has been a part of their lives for generations. Once it becomes a PSU, there are concerns that it will be open to interference by the political executive on not just recruitment, but also lending, and loan settlement. The timing of the move, when there is no elected government in place, and particularly a day after the Assembly was dissolved, has also been questioned.

Had the bank’s performance slipped?

Bad loans had risen in the last few years, from Rs 2,746 crore (6% of total advances) in 2014-15 to Rs 6,232 crore (10%) as on December 31, 2017.

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There were complaints that the bank was not responding to RBI queries on time, and its internal checks and balances had weakened. But experts argue the right approach would have been to bolster the corporate governance framework, such as strengthening the audit board, and getting better professionals. A Rs 3-crore fine slapped by RBI earlier this month, for non-compliance with its directions on Income Recognition and Asset Classification norms and Know Your Customer/ Anti-Money Laundering norms, has also sensitised the bank management to be more responsive. Such fines have been levied in the past on other private banks too, and in some cases RBI has actually prevailed upon bank chiefs to quietly pave the way for a change in guard.